Unified tariff draft regulations to benefit consumers located away from natural gas sources: ICRA


The Petroleum and Natural Gas Regulatory Board (PNGRB, the board) has released draft regulations pertaining to the implementation of Unified Tariff Regime (UTR) for the natural gas pipelines on September 29, 2020. The draft regulations essentially propose pooling of the existing approved pipeline tariffs of the pipelines comprising of the National Gas Grid to arrive at one single tariff to be charged across the pipelines and will be called the Unified Pipeline Tariff.

The regulations propose to divide the entire network into two zones, i.e. Zone-1 extending till 300 KM from the point of injection of natural gas in the national gas grid from either end i.e. Western or Eastern end of the grid and the entire length thereafter comprising of Zone-2. The tariff paid by the consumers in each of the zone will be a uniform single tariff irrespective of the location.

The new regime also does away with the additive nature of the tariff to a large extent wherein earlier a consumer receiving natural gas flowing through multiple pipelines had to pay pipeline tariff for all the pipelines leading to the additivity of the pipeline tariffs. The draft regulations will remain revenue neutral for the gas pipeline operators although there will be redistribution of the transmission tariffs being paid by the consumers post the implementation of these regulations. The board has sought comments/views from various stakeholders by October 20, 2020 and will be holding an open house on October 29, 2020, for discussing the same.

Commenting on the development, Mr. K Ravichandran, Group Head & Senior Vice President, ICRA said, “Implementation of Unified Tariff for the entire natural gas grid has been a long-pending demand for promoting the development of a gas-based economy. In the current tariff regime, farther a player is located from the natural gas source, more the consumer pays for the transportation of the natural gas, thus resulting in a concentration of gas-based industries near the natural gas sources.

For consumers located away from the natural gas sources, a significant portion of the natural gas cost comprises of the transmission tariff due to higher approved tariffs and additive nature of the transmission tariffs. With the implementation of the Unified tariff regime, this pricing linked dislocation in the natural gas pricing will be done away with. While at first it may look like the additive nature of the transmission tariffs is being done away with, but with the regulations ensuring revenue neutrality for the gas transmission players, the additive impact is getting redistributed across the industry players.

As a result, the consumers located nearer to the gas sources will witness an increase in the tariff resulting in lower tariff for far off consumers. The regulations will maintain revenue neutrality for the gas transmission players and thus the return metrics for the players are expected to remain unaffected. These regulations will also support gas offtake through new pipelines like Urja Ganga as the effective tariff paid by the consumers for consumers of such pipeline is expected to come down by nearly 50% due to lower tariffs.”

While moving towards a Unified Tariff Regime is a positive step towards increasing the share of natural gas in the overall energy mix of the country, several other steps will have to be implemented till we see a meaningful uptick in natural gas consumption in the country. Some of the reforms that have been long pending include the pricing deregulation of natural gas in the country, inclusion of natural gas under the Goods and Services Tax (GST), development of integrated pipeline network and development of an integrated gas trading hub/exchange are some of the reforms GoI will have to undertake to make any meaningful impact on natural gas offtake in the country.

Some of the other steps that have also remained under consideration include unbundling of the marketing and transmission business of GAIL (India) Limited and an independent system operator for pipelines. However, the movement on these issues has been very slow and any material uptick in the natural gas offtake will be contingent on the resolution of these issues by the regulator and the GoI.